EARNED VALUE MANAGEMENT SYSTEM

EARNED VALUE MANAGEMENT SYSTEM

1.0 OVERVIEW
Background
In the midst of a typical project, it is often desirable to estimate such quantities as how much time is left? or how much of the work is complete? or how much money will the project spend before it is complete? So managers have a responsibility to understand how long a project will take to get to its destination - and what it will cost. Those working on the project usually want to know this too. Earned Value Analysis (EVA) is a way to measure the amount of work actually performed on a project (i.e., to measure its progress) and to forecast a projects cost and date of completion. The method relies on a key measure known as the earned value (also known as the budgeted cost of worked performed or BCWP). This measure enables one to compute performance indices for cost and schedule, which tell how well the project is doing relative to its original plans. These indices also enable one to forecast how the project will do in the future. Earned value actually uses three data values, which are computed each week, month, or whatever other period you wish to use. We use the term analysis date to refer to the date when the three values are analyzed. The three values are: Budgeted Cost of Work Performed (BCWP) Budgeted Cost of Work Scheduled (BCWS) Actual Cost of Work Performed (ACWP)

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1.2 Definition of the Three Basic Values

BCWP or Budgeted Cost of Work Performed or Earned Value: This is the cost originally budgeted to accomplish the work that has been completed as of the analysis date. It answers the question how much work has actually been completed? . BCWS or Budgeted Cost of Work Scheduled or Plan: This is the total budgeted cost up to the analysis date. It answers the question how much did we plan to spend as of this date? A variant of this question is how much work should have been completed by this date? BCWS can be computed from the projects plans, or it can be approximated by multiplying the total budget by the fraction of total project duration at the analysis date. ACWP or Actual Cost of Work Performed: This is what it actually cost to accomplish all the work completed as of the analysis date. It answers the question how much have we actually spent?. This is usually determined from the organizations accounting system, or can often be approximated by multiplying the number of people by the number of hours or days or weeks worked.

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1.3 Derived Metrics

Four measures can be computed from the basic values described above: Schedule Variance (SV) = BCWP - BCWS

If it is 0, you are right on schedule. If it is negative, you are behind schedule. If it is positive, you area ahead of schedule. Schedule Performance Index (SPI) = BCWP / BCWS

If it is 1, you are right on schedule. If it is less than 1, you are behind schedule. If it is greater than 1, you are ahead of schedule. Cost Variance (CV) = BCWP - ACWP

If it is 0, you are right on budget. If it is negative, you are over budget. If it is positive, you area under budget. Cost Performance Index (CPI) = BCWP / ACWP

If it is 1, you are right on budget. If it is less than 1, you are over budget. If it is greater than 1, you are under budget.

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2.0 Using EVA to Determine Where you Are

2.1 Units
There are many ways to measure cost. For example, we could measure actual money spent. However it is common in a work environment to measure cost in terms of labor - that is in work hours or work days spent. EVA can be used with any measure of cost, but it is important to decide which one to use.

3.0 Using EVA to Forecast

3.1 Additional Terminology and Definitions
Five additional terms will be used in forecasting: BAC - Budget At Completion = Total Original Budgeted Cost This is the same as BCWS at completion. EAC - Estimate At Completion = your estimate of the amount of money you will spend on the project. This is based on your judgment. IEAC - Independent Estimate At Completion = Projected final cost of the project, based on performance so far. IEAC can be forecast using the following formula: IEAC = BAC / CPI ISAC - Independent Schedule At Completion = Projected duration of the project, based on performance so far. ISAC can be forecast using the following formula: ISAC = Schedule / SPI VAC - Variance At Completion = Forecast of final cost variance = BAC - IEAC or, if you prefer, VAC = BAC - EAC

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4.0 Can we Catch Up?

4.1 To-Complete Performance Index
Once we report that our project is behind schedule or over budget, the next question is usually can we do something to get back on track? Can we meet the desired schedule and budget despite the fact that we are running behind? Two indices are computed to help determine this. The To-Complete performance index is an indication of how we must perform for the duration of the project in order to meet our desired cost goal. If TCPI is greater than 1, we must perform better than planned in order to meet the goal; and if less than 1 we can get by with performing under our plan. TCPI = (Budget-BCWP)/ (EAC-ACWP)

where EAC is the amount we estimate we will spend. Looking closely we see that the numerator is how much work is left to do and the denominator is how much we have left to spend. Note too that if EAC is simply IEAC, then the TCPI is the same as the CPI - i.e., it indicates that if we do not change our performance, IEAC is the correct estimate of our final cost. I mentioned two indices. A schedule index can also be developed.

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5.0 Using EVA on a Project

5.1 The Micro Schedule - Identifying the Tasks
There are many ways to use EVA on a project, but the method we will illustrate here is one of the easiest and must useful. We begin with a micro schedule - a schedule of small tasks whose duration can be measured in days or weeks. Typically a micro schedule applies to a portion of a project and is estimated by those doing the work, often just before they begin that portion of the project (figure 1).

Top Level Schedule

Phase 1 - D esign Phase 2 - C ode Phase 3 - Shakedow n

Micro Schedule for the Next Phase

Micro Schedule is the locallymanaged schedule, defined by those doing the work

Figure 1 - EVA Micro Schedule The micro schedule represents the work tasks ("inchstones") required to do the job as well as who is assigned to do each task and their estimates of the effort required. Each task must have: objective completion criteria so you really know when they are done; "budgets" or "values" (usually represented as person days of effort or dollars of cost); planned completion dates so you know when you expect them to be done.

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Table 1 illustrates a typical micro schedule: Table 1 - Micro Schedule for Coding Phase, Project XXX Estimated Effort Planned Task Set Up Get Specs Design Output Plan Tests Write Code Unit Test Integrate Beta Test TOTAL (work days) 3 2 10 3 5 3 2 3 31 Completion Date (week #) 1 2 5 6 7 8 9 10 Responsible Software Developer(s) Joe Mary Pete & Joe Joe Mary Joe Mary Pete

(The approach illustrated above relies on the judgment of the participants but if the organization is at SEI CMM level 1 or 2, it may not utilize any information from past projects other than the experience of the participants. In an organization at CMM level 3, the micro schedule might be defined by using the organization's (tailored) process. At level 4 or higher, it might be defined by using the process, the judgment of the participants, and past performance data.)

5.2 Computing the Effort Planned (BCWS)

The effort planned is determined by calculating, from the micro schedule, how much work will be completed by the end of each week. Table 2 illustrates a typical BCWS chart.

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Table 2 - BCWS for Coding Phase, Project XXX Shorthand BCWS Week 1 2 3 4 5 6 7 8 9 10 Total Value that we Plan to Earn by That Week (Total/week #) 3 3 5 6 7 (*) 9 11 (*) 12 15 15 18 19 23 22 26 25 28 28 31 31 (*) Assumes partial progress on design output task

5.3 Collecting Earned Value Each Week

Each week during the project, the team needs to indicate, at the end of the week, which tasks are complete and, therefore, how much value has been earned. The example shown in Table 3 gives partial credit for some tasks. It is recommended that partial credit only be allowed for larger tasks and then only in large chunks ( , 1/3 , or maybe ).

Table 3 - Earned Value Data, Week ending Oct 29, 1999, Project XXX Task Set Up Get Specs Design Output Plan Tests
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Effort (value) (work days) 3 2 10 3

% Complete 100 50 25 0

Earned 3 1 2.5 0 Page 8

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Write Code Unit Test Integrate Beta Test TOTAL

5 3 2 3 31

0 0 0 0

0 0 0 0 6.5 (BCWP)

BCWP or earned value is the total of the earned column on the right hand side. Table 3 is recomputed each week, whereas tables 1 and 2 need only be done once. BCWP will increase each week as the project progresses. At any given week, you have the BCWS from table 2 and the BCWP from table 3. ACWP is whatever number of person-days of work have actually been paid for. This is simply the week number multiplied by 5 (total days worked) multiplied by the number of people, if everyone works full time on just this project. If people share their time between projects or work on non-project activities, their actual work hours spent on the project must be determined proportionally.

5.4 Analyzing the Sample Project

Suppose table 3 represents the results at the end of week 3 on the sample project. Suppose the staff did not work 100% on this project, so that only a total of 10 work days have actually been spent on the project. Then: BCWS = 7 work days (from table 2) BCWP = 6.5 work days (from table 3) ACWP = 10 work days (from paragraph above) Then: SV = BCWP - BCWS = -.50 (you are behind schedule) SPI = BCWP / BCWS = 0.928 (you are running at about 93% of the planned schedule) CV = BCWP - ACWP = 6.5 - 10 = -3.50 (you are 3.5 staff days over budget) CPI = BCWP / ACWP = 0.65 (you are running over budget by about 35%) Forecasts: IEAC = BAC / CPI = 31/0.65 = 47.7 work days VAC = BAC - IEAC = 31 - 48 = -17 (17 work days over budget)
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ISAC = 10 / SPI = 10 / 0.928 = 10.7 work weeks In short, your project looks like it will come in about a week late and 35% over budget. What should you do now? At this point, things look pretty dismal for meeting the cost budget. You need to ask yourself these questions: Why is it taking more effort than planned? Did they underestimate the job? Are they losing too much productivity because they are being shared between this project and something else? Were there unforseen obstacles and, if so, have they been corrected? Is there some other reason? Was work performed on other tasks, but not enough to claim partial credit yet on table 3? Maybe things arent quite as bad as they look. The key point here is that EVA enables you to spot a potential problem early in the project and do something to correct the situation. You can also re-estimate the total project duration and cost at this point, or negotiate changes in the project with your management.

6.0 A Problem with SPI

6.1 The Problem
If a project runs longer than originally scheduled, cost estimating portions of EVA continue to be useful but the schedule estimation portions begin to fail -- the definitions of SV, SPI, and SAC do not work as described above. Instead, they begin to converge toward "on schedule" values and, when the project is complete, they show values of SPI = 1, SV = 0, and SAC = whatever the actual schedule turns out to be. This flaw in earned value analysis
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results from the fact that the schedule estimates are based on budgets rather than independent evaluations of the schedule.

6.2 Possible Solutions

One option is to use the values of SV, SPI, and SAC only until the originally scheduled completion date and not use them afterwards. This option is simple and it works well in many cases when the main concern is budget overruns rather than schedule overruns, or when the schedule overruns are not very large. Another option is to re-estimate the schedule and base all future calculations on this new schedule. (In effect, this is what automatically happens with EVA -- in the end, the new schedule is whatever the actual schedule happens to be.) Of course with this approach you never have a very good method of predicting how much the schedule overrun will be. A third option is to develop a new index, DPI or Delivery Performance Index, as an alternative to SPI. DPI is based on the original completion schedules of the individual work tasks. The specific terms and formulas are as follows: Actual Time - the time actually spent so far, in calendar days. Days Ahead - how many days ahead of schedule you are (negative if behind schedule). This can be derived from the original schedules of the individual work tasks. DPI - delivery performance index: DPI = (Actual Time + Days Ahead) / Actual Time

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This is harder to do and many accounting systems do not have a mechanism for keeping track of the necessary information. Further definition can be found in (Hudec, 1996) in the references.

7.0 CONCLUSIONS
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Thus, Earned Value Management is a program management tool that integrates the technical, cost, and schedule parameters of a contract. During the planning phase, an integrated baseline is developed by time phasing budget resources for defined work. As work is performed and measured against the baseline, the corresponding budget value is earned. From this earned value metric, cost and schedule variances can be determined and analyzed. From these basic variance measurements, the program manager (PM) can identify significant drivers, forecast future cost and schedule performance, and construct corrective action plans to get the program back on track. EVM therefore encompasses both performance measurement (i.e., what is the program status) and performance management (i.e., what we can do about it). EVM is program management that provides significant benefits to both the Government and the contractor.

8.0 References:
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1. Earned Value Management implementation guide, Department of Defense, United States of America 2. Defence Contract Management Agency, Department of Defence 3. Earned Value Analysis in the control of Projects ricardo viana vargas, msc, pmp 4. Practice standard for Earned Value Management; Project Management Institute, inc 5. Earned Value Management (evm) techniques for engineering and prototype production activities 6. A gentle introduction to Earned Value Management Systems, nlwot ridge consulting 7. Tutorial on Earned Value Management Systems, dennisj.frailey 8. http://www.pmi.org/

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